School Choice Programs and Pareto Improvement

A common critique leveled against school choice programs is that it will divert funds from public schools and leave those students who remain in those schools worse off than before. On the surface, this critique appears credible – a marginal decrease in the student population translates into a marginal decrease in per pupil funds, which, therefore, will leave those students with fewer resources, and a decline in academic performance – but in contrast, the evidence suggests otherwise. The evidence is explained through the mechanism of competition, in which an increasing amount of firms (in this case schools) into a market promote more efficient use of resources, lowering the costs with greater quality.

The concept within the field of economics of Pareto efficiency states that, given an initial allocation of goods among individuals, a change in the allocation of those goods that makes at least one person better off without making anyone else worse off is considered Pareto improvement. In the case of school choice programs, even with the change in the allocation of goods (funds), it would still be considered Pareto improvement if in doing so, no student remaining in public school programs is made worse off. In fact, the research suggests that it does not leave them worse off, but improves the academic scores of those students. Thus, within the field of economics, school choice programs are considered Pareto improvement.

The research on the effectiveness of school choice programs in relation to academic scores tends to focus on the academic achievements of school choice program students in comparison to their peers remaining in public schools of similar socioeconomic and racial backgrounds. While research shows consistent gains across various programs for African-Americans and Hispanics, little research explains the impact of school choice programs on public schools. However, Caroline Hoxby, a researcher at Harvard, studied the effect on public schools in three regions – Milwaukee, Michigan and Arizona – and found that there was a strong positive correlation between academic scores and the relative geographical closeness of that public school to a school choice private or charter school (the full report can be found here). In other words, the increased competition in the long run that was created as a result of school choice programs had a positive effect on the public schools dependent on the relative closeness of that school to a private or charter school. It incentivized the creation of new schools, which entered into the market and in turn, created positive results.

The research studied the effect on public schools that were “most affected”, “somewhat affected” and “not affected” by school choice vouchers. The first case was that of Milwaukee, which instituted a voucher program in 1991-92. It found that 4th grade math scores rose by 7.1 percentile points per year in schools most affected by vouchers, 5.3 percentile points in schools somewhat affected and just 3.7 percentile points by those schools not affected. The same robust positive correlation is revealed across science and language scores as well (see Figure 1).

Source: Hoxby, Caroline. “Rising Tide.” Education Next.

The State of Michigan established a charter school program in 1994. As in Milwaukee, the achievement scores in reading and math scores correlated with the competitive threat that each public school faced due to the charter schools. Reading scores in 4th grade displayed an annual increase in 6.4 scale points by those schools affected by charter schools compared to a 3.2 scale point annual increase in those not affected. The same is found in 7th grade reading scores in which schools affected by charter school competition increased at an annual rate of 3.7 scale points while those not affected increased only 1.6 scale points. Math scores did not display a robust correlation, but nonetheless, there existed a positive correlation (see Figure 2).

Source: Hoxby, Caroline. “Rising Tide.” Education Next.

Arizona’s charter school program, which was established in 1994, also displayed robust correlations in the academic performance of public school students subject to the competition created through school choice programs. The increase in percentile points of 4th grade public school students subject to the competition were near triple the score of schools that were not affected. Reading exams scored a 0.3 annual percentile increase in those schools not affected in contrast to a 1.4 annual percentile increase for those schools affected. In math, the 4th grade public schools not affected scored a 1 annual percentile increase while public schools affected scored a 3 annual percentile increase in scores. The same robust correlation is found in the 7th grade schools that were affected by the competition (see Figure 3).

Source: Hoxby, Caroline. “Rising Tide.” Education Next.

So, what does this suggest then? In the three cases studied, the increased competition that was created due to the establishment of school choice programs rose the academic scores at a greater rate of those public schools affected by the competition compared to those public schools not affected. Despite the claim that school choice programs will divert funds from public schools and in turn, will leave those students worse off than before, the evidence suggests otherwise. The allowance of competition into a comparatively closed market increases the well-being and scores of those schools and students affected in the long run. In terms of Pareto efficiency, the allocation of funds towards school choice programs not only raises the academic scores of those school choice students, but those students remaining in public schools as well. Therefore, school choice programs reflect a Pareto improvement in efficiency in the allocation of goods (funds) compared to the absence of school choice programs. This is surely something to be celebrated and implemented on a much larger scale if what we truly care about is the academic well-being of this country’s students.